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on Monetary Economics |
| By: | Cobham, David |
| Abstract: | This short paper use the perspective of the assignment problem to examine the evolution of the workings of monetary policy and the Monetary Policy Committee (MPC) of the Bank of England over its first 25 years. It outlines how the Bank, and the MPC, came across additional possible objectives and searched for additional possible instruments. It then argues the need for some recasting of the role of the MPC and the way in which it operates. |
| Keywords: | assignment problem, monetary policy, inflation targeting, inflation, economic growth |
| JEL: | E42 E52 E58 F33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hwuaef:281088&r=mon |
| By: | Olena Kostyshyna; Luba Petersen |
| Abstract: | This paper examines the value of direct communication to households about inflation and the uncertainty around inflation statistics. All types of information about inflation are effective at immediately managing inflation expectations, with information about outlooks being more effective and more relevant than that about recent inflation and Bank targets. We observe no downside to communicating about inflation with uncertainty on two measures: the level of expected inflation and uncertainty about it. On a third measure—probabilistic inflation expectations—we observe positive effects: they become more centered around the communicated ranges. However, communication with uncertainty weakens the link between expected inflation and spending plans, a key channel in the transmission of monetary policy. Communicating precise inflation outlooks can lengthen the effects of these communications on households. |
| Keywords: | Central Bank Research; Credibility; Inflation and prices; Inflation targets; Monetary policy and uncertainty; Monetary policy communications |
| JEL: | C93 D84 E59 E7 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-63&r=mon |
| By: | Patrick Aldridge; David Cimon; Rishi Vala |
| Abstract: | Central banks may engage in large-scale lending and asset purchases to stabilize financial markets and implement monetary policy during crises. The ability of these actions to restore financial market functioning is well documented; however, they come with costs. We provide a literature review of the costs associated with these central bank actions, without commenting on the net benefits they provide. We find support for the premise that crisis actions may negatively impact market liquidity, distort asset prices, create conflicts between monetary and financial stability objectives and increase rent seeking and unproductive uses of the liquidity provided by the central bank. We discuss measures that may mitigate the negative impacts of crisis actions. |
| Keywords: | Central bank research; Financial institutions; Financial markets; Financial stability, Lender of last resort |
| JEL: | E5 E58 G10 G20 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-30&r=mon |
| By: | Michl, Thomas R. (Department of Economics, Colgate University); Davis, Leila (Department of Economics, University of Massachusetts Boston) |
| Abstract: | The power of an inverted yield curve to predict recessions is widely discussed in the financial press, yet most undergraduate textbooks provide little discussion of this stylized fact. This paper fills this gap by extending a 3-equation textbook model to include an accessible treatment of a term structure of interest rates formed by the one-period policy rate and a two-period rate that obeys the Fisher Equation. The Phillips curve features partially anchored adaptive expectations, while financial markets and the central bank have perfect foresight. Using this framework, we show that raising the policy rate in response to an inflation shock inverts the yield curve. Whether this inversion foreshadows a recession, however, depends on the bank’s monetary policy rule, which we illustrate using numerical examples. In particular, we show that, with anchoring and an output-gap averse central bank, inflation can stabilize and the yield curve can invert without an ensuing recession. |
| JEL: | A22 E31 E43 E44 E52 |
| Date: | 2024–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2024-01&r=mon |
| By: | Yasin Mimir |
| Abstract: | We provide a theory on currency dynamics, capital flows and conditions for emerging market economy central bank asset purchases to leave room for manoeuvre for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks’ foreign borrowing capacity. Therefore, they curb the financial amplification of government bond sell-off shocks by mitigating private sector capital outflows and the accompanying exchange rate depreciation. The resulting limited rise in inflation reduces the pro-cyclicality of conventional monetary policy. Our framework sheds light on stable exchange rate dynamics observed after the unprecedented asset purchase announcements in emerging-market economies during the COVID-19 crisis. |
| Keywords: | Asset purchases, exchange rate, conventional monetary policy |
| JEL: | E62 E63 G21 |
| Date: | 2023–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:57&r=mon |
| By: | Yasin Mimir |
| Abstract: | We study conditions under which a leaning against the wind (LAW)-type monetary policy is advisable to address risks to financial stability. We do so within a regime-switching dynamic stochastic general equilibrium (DSGE) model with endogenous crises and persistent financial cycles based on partly backward-looking house price beliefs. Under empirically plausible financial cycles, LAW increases inflation volatility because it amplifies the effects of supply shocks on inflation. It also leads to a lower average inflation, resulting in more frequent episodes of a binding lower bound on interest rates. LAW is advisable only if (i) the central bank puts more weight on output stability or (ii) financial cycles are less persistent than observed. |
| Keywords: | leaning against the wind, monetary policy, financial cycle, regime-switching DSGE |
| JEL: | E52 E58 G01 |
| Date: | 2023–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:56&r=mon |
| By: | Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño Barrau; Omar Rachedi |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households' precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| Keywords: | heterogeneous agents, HANK models, neural networks, non-linear dynamics |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1160&r=mon |
| By: | Schmidt, Sebastian |
| Abstract: | What are the macroeconomic consequences of a government that is limited in its willingness or ability to raise primary surpluses, and a central bank that accommodates its interest-rate policy to the fiscal conditions? I address this question in a dynamic stochastic sticky-price model with endogenous shifts between an “orthodox” and a “fiscally-dominant” policy regime. The risk of future regime shifts has encompassing effects on equilibrium. Inflation is systematically higher than it would be if fiscal policy always adjusted its primary surplus sufficiently and monetary policy was solely concerned with price stability. This inflation bias is increasing in the real value of government debt. Regime-switching probabilities are not invariant to policy. The central bank can attenuate the risk of a shift to the fiscally-dominant regime by raising the real interest rate sufficiently moderately when inflation increases. Lower fiscal dominance risk, in turn, mitigates the inflation bias. JEL Classification: E31, E52, E62, E63 |
| Keywords: | endogenous regime shifts, fiscal dominance, fiscal policy, inflation bias, monetary policy |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242889&r=mon |
| By: | Yossi Yakhin (Bank of Israel) |
| Abstract: | The paper introduces foreign exchange interventions (FXIs) to an otherwise standard new-Keynesian small open economy model. The paper studies the transmission mechanism of FXIs, solves for the optimal policy, suggests an implementable policy rule, and evaluates the welfare implications of different policies. Relying on the portfolio balance channel, a purchase of foreign reserves crowds out private holdings of foreign assets, thereby raising the UIP premium and the effective real return domestic agents face. As a result, a purchase of foreign reserves contracts domestic demand. At the same time, it depreciates the value of the domestic currency, which raises the price of foreign goods relative to domestic goods, thereby expanding foreign demand for home exports and contracting domestic imports. The effect on production depends on the wealth effect on labor supply. Optimal FXIs completely insulate the economy from the effect of financial shocks, such as capital flows and risk premium shocks. A policy rule that aims at stabilizing the UIP premium brings the economy close to its optimal allocation, regardless of the source of the shocks. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. Calibrating the model to the Israeli economy, lifetime welfare gains from following optimal FXI policy, relative to maintaining a fixed level of foreign reserves, amount to 2.4% of annual steady state consumption. The results are robust to a variety of microstructures of the financial sector suggested in recent literature. |
| Keywords: | Foreign Exchange Interventions, UIP Premium, Monetary Policy, Open Economy Macroeconomics |
| JEL: | E44 E52 E58 F30 F31 F40 F41 G10 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2024.01&r=mon |
| By: | Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela |
| Abstract: | The euro area insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risk-taking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. JEL Classification: E52, G11, G22, G23 |
| Keywords: | monetary policy transmission, non-bank financial intermediation, portfolio re-balancing, risk-taking |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242892&r=mon |
| By: | Monika Junicke; Jakub Mateju; Haroon Mumtaz; Angeliki Theophilopoulou |
| Abstract: | We investigate the heterogeneity in the effects of monetary policy shocks on the distribution of wages and hours worked, using unique contract-level data from the Czech labor market and identifying monetary policy shocks using a narrative approach based on market surprises in interest rate futures. The results suggest that low-wage groups are hit more profoundly by monetary policy shocks than high-wage groups, and the effect of restrictive shocks is stronger in the manufacturing sector than in any other. Exploring other dimensions of the data offers insights into the heterogeneity of the the impact of monetary policy on different demographic groups. We show that low-educated and also young workers are more affected by restrictive monetary policy shocks due to their higher shares in low-wage groups. |
| Keywords: | Heterogeneity, monetary policy, shock identification, wage inequality |
| JEL: | C32 E24 E52 J31 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2023/4&r=mon |
| By: | Luis Ceballos; Jens H. E. Christensen; Damian Romero |
| Abstract: | We provide market-based estimates of the natural real rate, that is, the steady-state short-term real interest rate, for Brazil, Chile, and Mexico. Our approach uses a dynamic term structure finance model estimated directly on the prices of individual inflation indexed bonds with adjustments for bond-specific liquidity and real term premia. First, we find that inflation-indexed bond liquidity premia in all three countries are sizable with significant variation. Second, we find large differences in their estimated equilibrium real rates: Brazil’s is large and volatile, Mexico’s is stable but elevated, while Chile’s is low and has fallen persistently. Although uncertain, our estimates could have important implications for the conduct of monetary policy in these three countries. |
| Keywords: | affine arbitrage-free models; financial markets; frictions; monetary policy; rstar |
| JEL: | C32 E43 E52 G12 |
| Date: | 2023–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97578&r=mon |
| By: | OGAWA Eiji; LUO Pengfei |
| Abstract: | The international finance trilemma represents the trade-off among exchange rate stability, monetary policy autonomy and free capital flows, resulting in varied reactions to global risk factors among Asian economies. This study explores how various monetary policy objectives shape the diverse responses of Asian interest rates and exchange rates to global risk factors. Using the Structural Vector Autoregressive Model with Exogenous Variables (SVARX), we analyze the impulse responses of short-term interest rates and exchange rates to global risk factors, including the US monetary policy changes, global economic policy and financial risks, and oil prices. The main findings are as follows: first, we found that most of the Asian monetary authorities except Japan mirror the US monetary policy changes, demonstrating that a key policy objective is to stabilize their cross-border capital flows and exchange rates. The magnitude of mirroring depends on countries’ exchange rate regimes. Furthermore, although global economic policy and financial risks trigger the depreciation of most of the Asian exchange rates, their influence on Asian short-term interest rates is relatively smaller, showing the limited influence of global risk appetite on monetary policy objectives. Last, we found the opposite responses of Asian interest rates and exchange rates to oil prices, showing the diverse economic effects of oil prices on oil export and import countries. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24006&r=mon |
| By: | Qi Li; Xu Zhang |
| Abstract: | This paper investigates the differential impact of monetary policy on homeownership and housing returns among Black, Hispanic and White households. Using data on 13 million repeat sales from 1993 to 2020, we construct and analyze race-specific entries and exits of homeownership and housing returns for 140 metropolitan areas in the United States. Our findings reveal significant heterogeneity: for minority households, one unit of monetary tightening leads to a 15% lower housing return and a 31% lower entry into homeownership than White households. This heterogeneity primarily stems from the less favorable labor market responses of minority groups to contractionary monetary policy. These findings emphasize the unintended consequences of monetary policy on racial inequality in the housing market. |
| Keywords: | Monetary policy; Housing; Central bank research |
| JEL: | E52 E40 R00 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-62&r=mon |
| By: | Issiaka Coulibaly; Blaise Gnimassoun; Hamza Mighri; Jamel Saadaoui |
| Abstract: | The paper adds to the literature on the issue of public debt in African economies, by investigating the role foreign exchange reserves play in improving the level of indebtedness and as buffer of the negative effect of exchange rate depreciation while considering the exchange rate policy. Our results show a direct link between the level of foreign currency reserves and that of external debt in Africa. Particularly, we demonstrate that higher foreign currency reserves tend to decrease the public debt stock to GDP. This effect is even more significant when countries go through high exchange rate depreciation episodes (10% or higher). This impact, however, is not homogenous among country groups, as only countries with a floating exchange regime tend to benefit from this buffer effect compared to anchored regimes. In a time where most African economies face severe exchange rate depreciation episodes following the U.S. monetary tightening policy, central bankers and policy makers need to consider a plethora of policy issues including interventions in the FX market to mitigate depreciations and maintain a sustainable public debt stock. |
| Keywords: | Exchange Rate, International Reserves, Buffer Effect, Public Debt. |
| JEL: | F3 F31 F32 F34 H6 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-42&r=mon |
| By: | Jonas Becker; Maik Schmeling; Andreas Schrimpf |
| Abstract: | We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market. |
| Keywords: | cross-currency lending, exchange rates, granular instrumental variable, CIP deviation |
| JEL: | F31 E44 G21 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1161&r=mon |
| By: | Bindseil, Ulrich; Senner, Richard |
| Abstract: | Rapid and large deposit outflows from banks have regained attention in the context of the March 2023 demises of Credit Suisse, SVB and other regional US banks. Moreover, the possible introduction of CBDC or a marked success of stablecoins are perceived as additional clouds over the future of deposit funding. While the bank run literature rarely pays attention to where bank deposits can flow to, this paper distinguishes the different flow of funds mechanics across all possible destinations and reviews for each the current and prospective future factors that may contribute to the observed increase of the speed and size of bank runs. While some of these factors can be contained through policy measures, others, like the intensified competition between banks will inevitably stay, and bank balance sheet management and liquidity regulation need to accept the new normal of somewhat less stable and more expensive sight deposits. JEL Classification: E42, E51, G21, G23 |
| Keywords: | bank funding, bank runs, financial stability, flows of funds, liquidity crisis |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242887&r=mon |
| By: | Marc-André Gosselin; Sharon Kozicki |
| Abstract: | This paper aims to bridge the gap between models in research and models used to support policy decisions in central banks. Models used in central bank projection environments overlap with research models and benefit from lessons learned in research, but they differ from research models in important ways. For example, to deal with real-world macroeconomic projection issues, central bank models may have a broader scope. To inform policy decision-making, models generally need both a theoretical basis and an ability to “fit” the data. For repeated projection exercises, forecasters need models that can be adapted to deal with data flows, including historical revisions. And, to provide valuable advice, forecasters must incorporate judgement into their projections to address issues outside the scope of the model. If all these challenges are met, then central bank models and projections will also inform the economic narrative that helps the public understand the policy decisions. In this context, this paper is organized around four main themes: 1) model requirements for central bank purposes; 2) overview of the Bank of Canada’s main policy models—ToTEM and LENS; 3) challenges in meeting those modelling requirements; and 4) practical approaches to addressing some challenges under time constraints. The paper concludes with a description of how lessons learned from research and practice set the stage for the Bank’s future modelling agenda, as discussed in Coletti (2023). |
| Keywords: | Economic models; Monetary policy |
| JEL: | C32 C51 E37 E47 E52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-29&r=mon |
| By: | Shah, Anand; Bahri, Anu |
| Abstract: | This study proposes a new risk measure for stablecoins, that is based on the probability of the stablecoin’s price hitting a threshold exchange rate post which the stablecoin is subjected to the risk of “break the buck/ death spiral”. We also juxtapose the risk measure computed using different models - Vasicek, CIR, ARMA+GARCH and Vasicek+GARCH and suggest the policy implication of the estimated model parameters - rate of reversion (a) and long term mean exchange rate (b) for stablecoin issuers. The study compares the volatility behaviour of the stablecoins with that of the traditional cryptocurrency, Bitcoin, equity index, NASDAQ composite and fiat currency, EURO. Stablecoins tend to be “stable” barring the events such as Terra – Luna crisis, FTX Bankruptcy and Silicon Valley Bank crisis. Traditional asset backed stablecoins – Tether, USD Coin, Binance USD and True USD are less risky than the decentralized algorithmic stablecoin, FRAX and decentralized cryptoasset backed stablecoin, DAI. The proposed risk measure could be of utility to the stablecoin issuers of algorithmic and cryptoasset backed stablecoins and the regulators for setting the capital requirement to guard against the break the buck/ death spiral risk. |
| Keywords: | Cryptocurrency, Stablecoins, Terra – Luna crisis, FTX Bankruptcy, Silicon Valley Bank crisis, Risk Measure, VaR, Vasicek, CIR, GARCH, Bitcoin, Tether, USD Coin, Binance USD, True USD, DAI, FRAX |
| JEL: | F31 G01 G11 G15 G23 G28 |
| Date: | 2023–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119646&r=mon |
| By: | Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian |
| Abstract: | We investigate how unconventional monetary policy, via central banks' purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, we report two unintended side effects. First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. We document an increase in real estate prices due to this policy, which fuels real estate overvaluation. Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. We document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral. Our findings suggest that central banks' quantitative easing has substantial adverse effects in credit-saturated economies. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:281063&r=mon |
| By: | Shovon Sengupta; Tanujit Chakraborty; Sunny Kumar Singh |
| Abstract: | Forecasting a key macroeconomic variable, consumer price index (CPI) inflation, for BRIC countries using economic policy uncertainty and geopolitical risk is a difficult proposition for policymakers at the central banks. This study proposes a novel filtered ensemble wavelet neural network (FEWNet) that can produce reliable long-term forecasts for CPI inflation. The proposal applies a maximum overlapping discrete wavelet transform to the CPI inflation series to obtain high-frequency and low-frequency signals. All the wavelet-transformed series and filtered exogenous variables are fed into downstream autoregressive neural networks to make the final ensemble forecast. Theoretically, we show that FEWNet reduces the empirical risk compared to single, fully connected neural networks. We also demonstrate that the rolling-window real-time forecasts obtained from the proposed algorithm are significantly more accurate than benchmark forecasting methods. Additionally, we use conformal prediction intervals to quantify the uncertainty associated with the forecasts generated by the proposed approach. The excellent performance of FEWNet can be attributed to its capacity to effectively capture non-linearities and long-range dependencies in the data through its adaptable architecture. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.00249&r=mon |
| By: | Karen McGuinness |
| Abstract: | While climate change was largely tackled by government policies in the past, central banks are increasingly grappling with the risks climate change poses. They are evaluating their operational policies to reflect these risks and the transition to a net-zero economy. This paper explores the trade-offs and considerations central banks face. |
| Keywords: | Central bank research; Climate change; Financial markets |
| JEL: | D53 E58 E63 G32 Q Q54 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-31&r=mon |
| By: | Danial Lashkari |
| Abstract: | How can we accurately measure changes in living standards over time in the presence of price inflation? In this post, I discuss a novel and simple methodology that uses the cross-sectional relationship between income and household-level inflation to construct accurate measures of changes in living standards that account for the dependence of consumption preferences on income. Applying this method to data from the U.S. suggests potentially substantial mismeasurements in our available proxies of average growth in consumer welfare in the U.S. |
| Keywords: | real consumption; welfare; growth; Inflation; inequality; nonhomothetic preferences |
| JEL: | D63 E2 E31 |
| Date: | 2024–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97549&r=mon |
| By: | Marco Del Negro; Keshav Dogra; Aidan Gleich; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula |
| Abstract: | We document the real-time forecasting performance for output and inflation of the New York Fed dynamic stochastic general equilibrium (DSGE) model since 2011. We find the DSGE's accuracy to be comparable to that of private forecasters before Covid, but somewhat worse thereafter. |
| Keywords: | DSGE models; real-time forecasts; inflation |
| JEL: | E3 E43 E44 C32 C11 C54 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97565&r=mon |
| By: | Rohan Kekre (Chicago Booth and NBER); Moritz Lenel (Princeton University and NBER) |
| Abstract: | We study the effects of dollar swap lines using high frequency responses in asset prices around policy announcements. News about expanded dollar swap lines causes a reduction in liquidity premia, compression of deviations from covered interest parity (CIP), and depreciation of the dollar. Equity prices rise and the VIX falls, while the response of long-term government bond prices is mixed. The cross-section of high frequency responses implies that swap lines affect the dollar factor or the price of risk. Our findings are qualitatively consistent with models relating the supply of dollar liquidity to the broader economy. |
| Keywords: | dollar swap lines, liquidity premium, exchange rates |
| JEL: | E44 F31 G15 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2023-17&r=mon |
| By: | Alain P. Chaboud; Lisa Chung; Linda S. Goldberg; Anna Nordstrom |
| Abstract: | The foreign exchange market has evolved extensively over time, undergoing important shifts in the types of market participants and the mix of instruments traded, within a trading ecosystem that has become increasingly complex. In this post, we discuss fundamental changes in this market over the past twenty-five years and highlight some of the implications for its future evolution. Our analysis suggests that maintaining a healthy price discovery process and fostering a level playing field among participants are areas to watch for challenges. The consequences of the evolution of the FX market—well beyond those anticipated twenty-five years ago—remain active areas of research and policy consideration. |
| Keywords: | foreign exchange; currency; spot market; derivatives; FX Global Code |
| JEL: | F0 |
| Date: | 2024–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97576&r=mon |
| By: | Eva Hromadkova; Ivana Kubicova; Branislav Saxa |
| Abstract: | We examine interest rate pass-through in the Czech Republic over the period of 2004-2022. We investigate the speed and completeness of the transmission of changes in reference market interest rates to lending rates on loans to non-financial companies and housing loans. The use of a rolling window approach enables us to examine changes in the pass-through over time. In the case of housing loans, the transmission of the 5-year interest rate swap rate to client rates is strong in the long term, although currently it is not complete. A 1 percentage point increase in the unemployment rate implies an approximately 0.2 percentage point increase in the risk premium for the interest rate on loans for house purchase. Our estimates for loans to non-financial companies confirm that changes in the 3M PRIBOR are passed on almost completely with minimal delay. A 1 percentage point reduction in the output gap implies an approximately 0.1 percentage point increase in the risk premium for the client interest rate on corporate loans. |
| Keywords: | ARDL model, credit premium, interest rate pass-through, rolling windows |
| JEL: | C2 E43 E52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2023/02&r=mon |
| By: | Nizam, Ahmed Mehedi |
| Abstract: | Here we argue that the difference between market exchange rate and PPP exchange rate of the local currency unit with respect to the investing one induces gain/loss for the investing firm in terms of ownership of real assets. When the market exchange rate of the local currency unit is greater than its PPP exchange rate, then the foreign investors gain in terms of PPP in the local market, i.e., the foreign investors now get the ownership of more assets than they could probably have in their native land by investing the exact same amount of money. On the other hand, when the market exchange rate is lower than the PPP exchange rate, then the foreign investors incur losses in terms of asset ownership, i.e., they now own less amount of physical assets than they could have alternatively owned if they chose to invest in their native land instead. Building upon the above arguments, here we empirically estimate the regions where US FDI should flow toward in order to reap the maximum benefits arising out of exchange rate differentials and compare it with the actual US investments abroad. The strategy presented here will provide firms a new perspective to gauge their overseas investment opportunities. |
| Keywords: | FDI; market exchange rate; PPP exchange rate; multinational firms; wealth transfer |
| JEL: | F3 F4 F41 |
| Date: | 2023–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119597&r=mon |
| By: | Tumisang Loate; Nicola Viegi |
| Abstract: | This paper examines the interaction between macroeconomic variables and the fiscal and monetary policy mix between 2012 and 2019, a period characterised by increases in public debt and the sovereign risk premium, and low economic growth. Using a large Bayesian vector autoregression, we find that monetary and fiscal policy fail to account for the observed lower real gross domestic product between 2012 and 2019. Based on the historical relationship between monetary and fiscal policy in South Africa, the results indicate that we should have observed much higher growth, especially during the 20152019 period. In addition, we find little evidence that low growth during the period can be explained by the much-criticised anti-growth monetary policy. |
| Date: | 2024–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11054&r=mon |
| By: | Vahidin Jeleskovic; Stephen Mackay |
| Abstract: | Cryptocurrencies have emerged as a novel financial asset garnering significant attention in recent years. A defining characteristic of these digital currencies is their pronounced short-term market volatility, primarily influenced by widespread sentiment polarization, particularly on social media platforms such as Twitter. Recent research has underscored the correlation between sentiment expressed in various networks and the price dynamics of cryptocurrencies. This study delves into the 15-minute impact of informative tweets disseminated through foundation channels on trader behavior, with a focus on potential outcomes related to sentiment polarization. The primary objective is to identify factors that can predict positive price movements and potentially be leveraged through a trading algorithm. To accomplish this objective, we conduct a conditional examination of return and excess return rates within the 15 minutes following tweet publication. The empirical findings reveal statistically significant increases in return rates, particularly within the initial three minutes following tweet publication. Notably, adverse effects resulting from the messages were not observed. Surprisingly, sentiments were found to have no discerni-ble impact on cryptocurrency price movements. Our analysis further identifies that inves-tors are primarily influenced by the quality of tweet content, as reflected in the choice of words and tweet volume. While the basic trading algorithm presented in this study does yield some benefits within the 15-minute timeframe, these benefits are not statistically significant. Nevertheless, it serves as a foundational framework for potential enhance-ments and further investigations. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.00603&r=mon |